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Spanish Bonds Drop as Yields Surge at Auction; French Notes Gain

July 19, 2012

Spain’s bonds fell, with 10-year yields rising above 7 percent for the first time in a week, after the nation’s cost of borrowing surged at a debt sale.

German two-year yields were below zero for a 10th day as lawmakers backed a euro-area bailout of Spanish banks. Austrian, Belgian and French yields fell to records amid demand for havens with higher yields than Germany. Spain’s two-year notes dropped for a fourth day as demand declined at auctions of 2.98 billion euros ($3.65 billion) of debt. Ten-year yields above 7 percent pushed Greece, Portugal and Ireland to seek international aid.

“Each time they pay this sort of yield to borrow small amounts of money the dead weight they carry gets heavier,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “It’s a sign that control is slipping in Spain. After the auction we saw core bonds advance a bit and Spanish yields widen over them.”

Spain’s two-year yield climbed 15 basis points, or 0.15 percentage point, to 5.16 percent at 5 p.m. London time, extending its increase this week to 71 basis points. The 3.4 percent note due in April 2014 fell 0.235, or 2.35 euros per 1,000-euro face amount, to 97.08.

Spanish 10-year yields rose five basis points to 7.01 percent after reaching 7.04 percent, the highest level since July 10. The extra yield investors demand to hold the securities instead of German bunds widened to as much as 583 basis points, approaching the record of 589 basis points set on June 18.

Spanish Auction

The Madrid-based Treasury sold notes due in 2014 at an average yield of 5.204 percent, compared with 4.335 percent when they were last auctioned on June 7. It also sold five-year notes at 6.459 percent, versus 6.072 percent on June 21, and seven- year securities at an average yield of 6.701 percent.

Yields on German two-year notes, perceived to be among the safest securities because of the nation’s AAA rating, climbed one basis point to minus 0.053 percent. They fell to minus 0.074 percent yesterday, the lowest since Bloomberg began tracking the securities in 1990. Germany sold two-year debt at a negative yield for the first time yesterday.

Yields below zero mean investors who hold the securities to maturity will receive less than they paid to buy them.

German debt returned 12 percent in the year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, as investors sought a haven from Europe’s financial crisis. French and Finnish bonds each gained 11 percent as investors turned to the securities of other so-called core and semi-core nations to seek higher returns.

‘Yield Pickup’

“The hunt for yield pickup is continuing, especially in the non-bund core,” said Norbert Aul, a rates strategist at Royal Bank of Canada in London. “At the short-end,” German yields should stay negative, he said.

France sold 4.5 billion euros of five-year notes maturing in July 2017 today at an average yield of 0.86 percent. On June 21, the country auctioned securities due in February 2017 at 1.43 percent.

France’s five-year yield fell four basis points today to 0.75 percent, after dropping to a record 0.728 percent.

German lawmakers backed the euro-area bailout of Spanish banks after Finance Minister Wolfgang Schaeuble gave assurances that Spain will remain liable for the aid and parliament will be consulted on each step of the rescue.

Lower-house lawmakers were forced to interrupt their summer break as they were recalled to Berlin for a special session on bank recapitalizations for Spain of as much as 100 billion euros. They voted 473 to 97 in favor of the bill after the main opposition parties were persuaded to back Chancellor Angela Merkel’s government and most coalition dissent quelled.

‘Austerity Package’

“Spain seems confident that its sovereign debt crisis will be overcome thanks to the aid pledged to banks and the agreed austerity package,” Ulrich Wortberg, a strategist at Helaba Landesbank Hessen-Thueringen in Frankfurt, wrote in a note to clients. “Market participants are rather skeptical as risk premiums on Spanish bonds versus comparable bunds remain high.”

Volatility in Austrian government debt was the highest in the euro area today, followed by Belgium and Spain, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

Austrian 10-year bond yields fell to as low as 1.828 percent, and the rate on similar-maturity Belgian bonds dropped to 2.426 percent, both the least on record.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; David Goodman in London at

To contact the editor responsible for this story: Daniel Tilles at

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